Review of recent & relevant research.
- MoreLiver
24th Australasian Finance & Banking Conference
with very short summaries. Nice!
Selected Papers of First Day Conference Dec-14 – mathfinance.cn
Selected Papers of Second Day Conference Dec-15 – mathfinance.cn
Selected Papers of Third Day Conference Dec-16 – mathfinance.cn
Research Review: Housing & The Business Cycle – The Capital Spectator
How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries · End in Sight for Housing Troubles? · The Role of Capital Gains Taxes in the Housing Bubble · Household Balance Sheets, Consumption, and the Economic Slump · What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis · Real Estate Bubbles and Weak Recoveries
This paper summarises the main legal challenges for crisis management of ailing credit institutions and identifies the key features of an effective bank resolution regime.
Saving Imbalances and the Euro Area Sovereign Debt Crisis – N.Y. FED (pdf)
For several years prior to 2010, countries in the euro area periphery engaged in heavy borrowing from foreign private investors, allowing domestic spending to outpace incomes. Now these countries face debt crises reflecting a loss of investor confidence in the sustainability of their finances. The result has been an abrupt halt in private foreign lending to these economies. This study explains how the periphery countries became dependent on foreign borrowing and considers the challenges they face reigniting growth while adjusting to greatly reduced access to foreign capital.
Central Bank Imbalances in the Euro Area – N.Y. FED (pdf)
In particular, net outflows from private commercial banks in a given country are matched by credits to that county’s central bank, with those credits extended by central banks elsewhere in the euro area.
IPOs and Speculative Demand – SSRN
(1) speculative demand exerts a significantly strong influence on aggregate stock prices especially over short time horizons and (2) its drivers determine the cyclical pattern of IPOs, in terms of the number of issues, gross proceeds and level of riskiness. The findings suggest that both investors and companies seem to engage in market timing, and in particular the latter tend to time their issues on the movements in hedging and speculative demand. Overall, the drivers of speculative demand seem to constitute a new proxy for investor sentiment.
(1) speculative demand exerts a significantly strong influence on aggregate stock prices especially over short time horizons and (2) its drivers determine the cyclical pattern of IPOs, in terms of the number of issues, gross proceeds and level of riskiness. The findings suggest that both investors and companies seem to engage in market timing, and in particular the latter tend to time their issues on the movements in hedging and speculative demand. Overall, the drivers of speculative demand seem to constitute a new proxy for investor sentiment.
Information Management in Financial Markets: Implications for Stock Momentum and Volatility – SSRN
...the amount of positive information released by a company is positively related to both its future stock performance and future positive releases, suggesting that companies tend to ration the delivery of positive news and create sustainable price trends… At the same time, private information disclosures are negatively related to the arrival of public information, supporting the hypothesis that private information releases are timed to mitigate public information shocks. Accordingly, I find that stock volatility is significantly lower for firms that use reserves of positive private information as insurance against unanticipated negative events.
...the amount of positive information released by a company is positively related to both its future stock performance and future positive releases, suggesting that companies tend to ration the delivery of positive news and create sustainable price trends… At the same time, private information disclosures are negatively related to the arrival of public information, supporting the hypothesis that private information releases are timed to mitigate public information shocks. Accordingly, I find that stock volatility is significantly lower for firms that use reserves of positive private information as insurance against unanticipated negative events.
How many Commodity Sectors are there, and How do they Behave? – SSRN
We find evidence for five commodity sectors that naturally conform to the standard functional categorizations typically used by the investment industry (industrial metals, energy, precious metals, grains & oilseeds, and livestock). Of the typical investment industry categorizations, only softs do not share a common factor. Using spot data to extend the history of commodity futures, we examine the performance of commodity sectors during periods of economic interest to investors and find 1) The industrial metals sector is very sensitive to economic conditions, while the grains & oilseed sector is insensitive. 2) Energy and precious metals are the sectors that earn the highest returns during periods of high and unexpectedly high inflation. 3) Precious metals do not do well when economic conditions are poor and do not outperform the typical commodity during those periods. 4) We show that commodities in general, and all commodity sectors, earn positive returns during US Dollar crashes.
Betas, Hedge Funds and the Myth of Market Neutrality – SSRN
…we demonstrate that constructing market neutral funds by standard methods is often very inaccurate. Our findings highlight the need for higher frequency return data to be more commonly utilized. We demonstrate an approach using daily returns over the past year that is easy to implement and delivers more reliability in achieving market neutrality.
Risk-Based Asset Allocation: A New Answer to an Old Question? – Neuberger Berman (pdf)
Many studies attribute the better performance of these risk-based asset allocation approaches to superior diversification. Given the absence of clearly defined investment objective functions behind these approaches as well as the metrics used by these studies to evaluate ex-post performance, we put these approaches into the same context of mean-variance efficiency in an attempt to understand their theoretical underpinnings.
Diversifying Risk Parity – SSRN
Striving for maximum diversification we follow Meucci (2009) in measuring and managing a multi-asset class portfolio. Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. Our paper characterizes the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques like 1/N, minimum-variance, risk parity, or the most-diversified portfolio and demonstrate the diversified risk parity strategy to be quite meaningful when benchmarked against these alternatives.
Striving for maximum diversification we follow Meucci (2009) in measuring and managing a multi-asset class portfolio. Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. Our paper characterizes the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques like 1/N, minimum-variance, risk parity, or the most-diversified portfolio and demonstrate the diversified risk parity strategy to be quite meaningful when benchmarked against these alternatives.
Currency Momentum Strategies – SSRN
We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a significant cross-sectional spread in excess returns of up to 10% p.a. between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, cross sectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets.
We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a significant cross-sectional spread in excess returns of up to 10% p.a. between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, cross sectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets.
Do Buy-Side Recommendations Have Investment Value? – SSRN
Short recommendations from these analysts generate an immediate and significant decline in price. Long recommendations have positive short-term returns and exhibit a positive drift. Our collective evidence suggests buy-side recommendations have investment value. We also document that broad institutional ownership decreases significantly for buy-side recommendations, but increases for the buy-side analysts’ employers, suggesting there is a wealth transfer between the broader institutional market and buy-side firms in our sample.
Short recommendations from these analysts generate an immediate and significant decline in price. Long recommendations have positive short-term returns and exhibit a positive drift. Our collective evidence suggests buy-side recommendations have investment value. We also document that broad institutional ownership decreases significantly for buy-side recommendations, but increases for the buy-side analysts’ employers, suggesting there is a wealth transfer between the broader institutional market and buy-side firms in our sample.
The Information Content of the Embedded Deflation Option in TIPS – FED
We conclude that the embedded option in TIPS contains useful information for future inflation, both in-sample and out-of-sample.
The (sizable) Role of Rehypothecation in the Shadow Banking System – IMF
We show that the shadow banking system was at least 50 percent bigger than documented so far. We also provide estimates from the hedge fund industry for the – churning – factor or re-use of collateral. From a policy angle, supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of the off-balance sheet funding that these banks receive via rehypothecation from other jurisdictions.
When Do Trading Frictions Increase Liquidity? – N.Y. FED
I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.
Revised: "Core principles for effective banking supervision" – BIS
The consultative paper updates the Committee's 2006 Core principles for effective banking supervision and the associated Core principles methodology, and merges the two documents into one. The Core Principles have also been re-ordered, highlighting the difference between what supervisors do themselves and what they expect banks to do
Central Bank Announcements of Asset Purchases and the Impact on Global Financial and Commodity Markets – S.F. FED
…We show that announcements about these purchases led to lower long-term interest rates and depreciations of the U.S. dollar and the British pound on announcement days, while commodity prices generally declined despite this more stimulative financial environment. We suggest that LSAP announcements likely involved signaling effects about future growth that led investors to downgrade their U.S. growth forecasts lowering longterm US yields, depreciating the value of the U.S. dollar, and triggering a decline in commodity prices. Moreover, our analysis illustrates the importance of controlling for market expectations when assessing these effects.
Bank of Thailand-BIS Research Conference on 12-13 Dec
The Macroeconomic Effects of Large-Scale Asset Purchase Programs – N.Y. FED
The effects of asset purchase programs on macroeconomic variables are likely to be moderate.